A big bear turns bull. But what is the true ‘contrarian’ view these days?
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No one chronicled this decade’s debt-fueled economic/market bubble, and its subsequent cataclysmic pop, more eloquently than Jim Grant of Grant’s Interest Rate Observer newsletter in New York.
To Wall Street (and Main Street) bears, Grant has long held oracle status. He told you this was coming.
So you could almost hear the bear camp’s collective gnashing of teeth over the weekend after Grant, writing in the Wall Street Journal, predicted that the economy would come roaring out of the Great Recession.
‘Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner,’ he wrote in a piece headlined, ‘From Bear to Bull.’
Grant’s central thesis is that the recovery should follow form: Historically, ‘The deeper the slump, the zippier the recovery,’ he noted. He also rests his case on the assumption that the majority of forecasters are gloomy about the economic outlook, and therefore are likely to be proved wrong. In that sense, Grant is playing his usual role: contrarian.
To the English economist Arthur C. Pigou is credited a bon mot that exactly frames the issue. ‘The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.’ So it is today. Paul A. Volcker, Warren Buffett, Ben S. Bernanke and economists too numerous to mention are on record talking down the recovery before it fairly gets started. They collectively paint the picture of an economy that got drunk, fell down a flight of stairs, broke a leg and deserves to be lying flat on its back in the hospital contemplating the wages of sin. Among economists polled by Bloomberg News, the median 2010 GDP forecast is for 2.4% growth. It would be a unusually flat rebound from a full-bodied downturn.
Still, these days it’s hard to identify the true contrarian position. You have to be sure to ask: For what time period? Many economists believe that growth could be surprisingly strong in the near term, which would jibe with Grant’s new view. It’s the second half of 2010 that worries most people.
Likewise, there is no shortage of stock market bulls at the moment -- as long as we’re talking about the next few months. But finding someone who’s optimistic about U.S. stocks for the next two to three years is a much tougher trick.
Oddly, given what we know he knows about the bubble era, Grant doesn’t address the issue that most concerns many of the economy’s entrenched pessimists: the expected drag on consumption as millions of Americans try to dig out from under record debt loads.
And, despite the headline on his piece, Grant isn’t predicting what the stock market will do from this point, even if he’s right about the strength of the recovery. He notes that the market already has rocketed since March, helping to underpin expectations for renewed economic growth.
Grant still maintains his well-defined hostility toward the Federal Reserve, which he believes has grossly overreacted to the recession and credit crisis by pumping massive sums into the financial system. That will ensure a recovery, he says, but it also may ultimately destroy the dollar.
By driving money market interest rates to zero and by setting all-time American records in money-printing ($1.2 trillion conjured in the past 12 months), the Fed is putting the value of the dollar at risk. Its wide-open policy all but begs our foreign creditors to ask the fatal question, What is the dollar, anyway? Why, the dollar is a scrap of paper, or an electronic impulse, the value of which is anchored by the analytical acuity of the monetary bureaucracy that failed to predict the greatest financial crackup since the 1930s.
But that wasn’t a big enough bone for Grant to throw many of his still-bearish followers, who see his change of heart as an epic act of capitulation.
As one commenter wrote on the Journal website: ‘While I both admire and respect Mr. Grant and his economic observations, just the mere fact that he is now bullish can only mean one thing: Sell everything you’ve got and run for the hills. Literally.’
-- Tom Petruno